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December 5, 1998

Banks Are Rushing to Prepare for Launch of Euro


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    By JOHN TAGLIABUE

    VERONA, Italy -- The bank where Salvatore Bellu works is strongest in Italy's dynamic northern industrial belt, filled with mighty little multinationals, like Zanussi and Rex, washing-machine makers in Sweden's big Electrolux appliance group. Come January, Electrolux is shifting its business to Europe's new single currency, the euro, and Zanussi and Rex are under orders to do likewise.

    Even though Sweden will be outside the euro zone, Electrolux, by adopting the single currency, expects to reduce costs and avoid having to hedge against currency fluctuations, all of which should pay off in increased competitiveness.

    So if Electrolux wants to pay bills in euros, or transfer funds from one bank to another, Bellu's bank, Cariverona Banca SpA, will be ready for it to do so. For two years the bank has been throwing money and people at the task of getting ready for the euro, or risk seeing lucrative customers flee to better-prepared competitors.

    Cariverona is caught in a rush that is reaching a crucial stage as the date for introducing the new currency, Jan. 4, nears, pitting bankers, software specialists and consultants against the guts of a banking system that serves 290 million Europeans.

    If it works -- and major banks are reasonably sure it will -- Europe will take a further giant stride toward overcoming traditional economic fragmentation by operating under the umbrella of a uniform monetary policy on most of the old Continent.

    Indeed, by cutting short-term interest rates simultaneously on Thursday to a nearly uniform 3 percent, the central banks of the 11 nations that will join the euro essentially opened the door to the new era this week.

    Of the 15 countries in the European Union, three qualify but are staying out for now: Britain, Denmark and Sweden. Greece has not met the requirements. The participants are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

    For starters, banks in the euro countries will be required by law to keep track of day-by-day operations -- deposits, withdrawals and the like -- in euros as well as the local currency, and to make all bank-to-bank transfers in the new single currency.

    Regular reporting to national central banks, which will function under the new European Central Bank somewhat as regional Federal Reserve Banks operate in the United States, must be in euros. And since securities markets like the stock exchanges in Paris, Milan and Frankfurt, Germany, must operate in euros, the banks' brokerage units will have to be equipped for euro-denominated investments.

    Thus, brokerage firms, banks and financial-service companies, spurred in many cases by euro-prone customers, are racing to get ready. Most will use the long weekend in early January to fine-tune systems for the start of business on Monday, Jan. 4.

    "Sure, there will be some problems," said Bellu, who has overseen his bank's drive to the euro, with a sigh of realism. "Monday the 4th will tell us if it works."

    Christian Noyer, deputy chairman of the European Central Bank in Frankfurt, said the central banking system appeared ready to go. "All the systems have been tested and retested," he said in a recent interview. "The worst has been imagined, along with the solutions."

    Euro coins and bills will not be introduced until the end of 2001, but starting in January the marks and francs and lire in circulation will simply be fixed units of the new euro, the banking system's fundamental yardstick.

    And since much commerce in Europe, as in most modern economies, is conducted without cash, hotels, department stores and most other consumer-oriented businesses are moving to list prices and take payment in both euros and local currencies.

    American Express will offer credit-card and banking services in euros and local currencies; in January it will start selling euro traveler's checks in 21 countries, including the United States.

    "Early indications are that large department stores and hotel chains are ready to price in euros and accept payment," said Keith Meyrick, spokesman for the traveler's-check program in London.

    For American travelers to Europe, the advantage is clear. With 11 European currencies locked together in the euro, euro traveler's checks will be exchangeable for all 11 currencies at a predictable rate, reducing the need to exchange dollars into local currencies along the way and thus the risk of losing money if the dollar-euro exchange rate shifts.

    "Anyone who sees a competitive advantage in the euro will use euros," said Bruno Leresche, who heads the transition to the euro at Paribas, the big French financial-services group.

    The biggest question for bankers is the extent to which ordinary consumers will switch to euros. Will customers want bank accounts denominated in euros, or request monthly statements in both euros and local currencies? Partly, that will depend on how soon, say, employers begin transferring salaries to employees' bank accounts in euros, or how soon landlords require that rents be paid in euros.

    Given their druthers, many customers do not appear eager to switch, bankers say. Recently, Paribas surveyed its private clients, and few even bothered to reply, Leresche said. Customers reacted, he said, as they do to a new model television set. "When I see my neighbor get one," he said in describing the common attitude, "I'll buy it."

    Still, banks that want to be competitive are striving to be ready. They are tailoring computers and software to enable monthly statements to be issued in euros, or in a combination of euros and local currencies.

    Thus, a bank customer who regularly receives deposits on a French franc account in German marks and Spanish pesetas might request that monthly statements give the total euro amounts plus a breakdown into local currencies. Some banks are already gearing their computer software to be able to provide such information.

    And well-prepared banks are trying to persuade customers to make the switch to euros sooner rather than later. Paribas, Leresche said, spent $71 million preparing. Come January, it will offer all services in French francs, euros or a combination of currencies.

    Over two years, Cariverona invested $8 million to overhaul 30,000 software applications, said Bellu, including some that prepare monthly statements and others for making interbank payments, and to train personnel to explain the benefits.

    By the year 2002, Deutsche Bank will have spent $295 million for euro conversion, according to Victor Bruns, its euro project manager. He figures the bank has burned up "1,200 man-years" on the project. "We believe we will make it, but a switchover of this magnitude is a unique thing," he said.

    Gartner Group, the U.S. technology consultants, estimates that Europe's total investment between 1996 and 2002 to introduce the euro will be as much as $400 billion.

    Experts agree that much has already been accomplished.

    "It's been mostly a people and systems challenge, and overall, it's been very well met," said Keith Stock, head of A.T. Kearney's global financial institutions group in New York.

    Given the costs, many banks are trying to kill two birds with one stone, eliminating the so-called Y2K millennium bugs from computers while preparing for the euro. Despite shortages of consultants and software experts that have driven up the cost of services, what makes the situation manageable, bankers say, is that not everything must be done at once.

    Banks have concentrated efforts on absolute requirements, like interbank payments. Paribas' Leresche said French banks had done "virtual transfers" on recent weekends to test transfers among banks. The banks, he said, distinguish between fundamental snags in the system and those that simply make it slower or less efficient.

    "There have been no fundamental bugs," he said, reflecting a widespread impression in other European countries.

    What troubles bankers much more, however, is the euro's impact on their income, a problem not fixable with new software.

    Earnings from foreign exchange, traditionally a lucrative source of profit, will dry up. Italy's banking association predicts that gross profits in the industry will drop an average 37 percent after the euro. Cariverona says it will shed 80 percent of its foreign-exchange trading.

    Moreover, the fiscal belt-tightening required to qualify for the euro has led to lower interest rates, narrowing the spread between the relatively low interest banks pay on deposits and what they earn by reinvesting the deposited assets in high-yielding securities, like government bonds, thus squeezing a second major source of bank income.

    To offset this decline in traditional income sources, many banks hope to expand investment banking. But experts agree that the process will create many winners and losers, leading to further bank concentration.

    In France, small rural banks with few corporate customers are moving more slowly than banks in Paris. In Italy, banks in the south, still struggling with losses accumulated in the early 1990s, are far from ready. Experts say most will be able to execute essential functions, like interbank transfers, but may not be prepared to offer customers extra services, like dual currency statements or other euro-denominated services.

    Rome's Banca Nazionale del Lavoro, the government-owned bank whose executives have been getting it ready for an offering of shares on the stock market, will be ready to meet the requirements for the euro, but they have had little time to push a euro strategy much beyond that.

    Often small banks are under little pressure from corporate customers to change. "Among Italian small businesses, the degree of preparation is very low," said Angelo Peretti, an economist at Cariverona. They view the euro, he said, "mainly as an accounting and monetary problem, not as a strategic problem."

    Earlier this year, General Motors' European unit told 15,000 suppliers across Europe, many of them small and medium-sized companies, that they should be ready by January to quote prices in euros. Hans De Vriese, director of cost management for GM's European purchasing, said that 95 percent replied that they were ready to do so.

    In Germany, big corporate customers have told Volkswagen that they want prices in euros as soon as possible. Beginning in January, VW will comply, and it has passed the message to its suppliers. Brigitte Dietz, who heads VW's push to the euro, said the company hoped to switch from dollars and German marks as its operating currencies to the euro. Still, she said, "We won't force anyone."

    Paradoxically, the very governments that imposed the euro are the biggest obstacles to its wider use.

    Earlier this year, Italy said its tax-collecting and social-security offices would not be ready to deal in euros until 2002; in Belgium and Germany, local and federal tax offices and benefits agencies have said the same. Thus, for internal accounting, VW will introduce the euro "at the latest possible date, in order to spare resources," Ms. Dietz said.

    Moving sooner, she said, would mean "still having to do everything in German marks, and that would cost two to three times as much."




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